“Either your money has to work for you, or you have to work for your money,” says financial planner Nicolas Abrams.
Baltimore native Nicolas Abrams has been working in the financial services industry for 25 years. The certified financial planner opened his own registered investment advisory (RIA) firm, Opulentia LLC, in Hunt Valley, Md. in 2009.
As an RIA, Abrams’ business has a fiduciary responsibility to act in the best interests of their customers.
“We are able to take a holistic approach to financial planning where we don’t have to push an individual product down a client’s throat,” said Abrams. “We can work with a wide range of money managers and insurance companies to find the best need for our clients.”
Abrams debunked some of the myths that could be holding people back from maximizing their savings and broke down the best savings account options based on different financial situations.
Common misconceptions about saving
For Abrams, one of the biggest misconceptions people face is that they should save less when the market is volatile. Though economic downturns may spread fear and uncertainty, Abrams said they should refrain from becoming too conservative in how they reserve their money.
“Either your money has to work for you, or you have to work for your money. What I mean by that is that your money, at a bare minimum, has to keep pace with inflation, but it really needs to outpace inflation,” said Abrams. “If all of your money is in an account earning 2% interest, but inflation is at a 4% rate, all you’re doing is safely losing money.”
Another misconception Abrams noted is that people think they do not need specific savings goals and should just have a catchall savings account.
“People should have money in different buckets for different reasons,” said Abrams. “You can’t save for retirement the same way you save for a down payment on a car or for your kids’ education. You have to make sure you’re choosing the right options for your goals.”
Saving for retirement
One of the most prominent ways people save for retirement, according to Abrams, is through a 401(k) plan at their employer.
“You choose an amount that comes right from your paycheck each pay period, and, generally, your employer will put some type of match in,” said Abrams.
If their employer does not offer this plan, individuals have the option to open individual retirement accounts (IRAs) or Roth individual retirement accounts (Roth IRAs). One of their major differences is their tax treatment.
IRAs are tax deductible, giving people a tax break up-front that will be paid upon withdrawing the money in retirement. Money that goes into Roth IRAs are after-tax dollars, allowing people to make tax-free withdrawals in retirement.
“You can’t beat tax-free,” said Abams. “I’ll take tax-free all day long over something that’s taxable.”
Funding education expenses
When saving for college, Abrams recommended opening a 529 plan, which can be used for tuition; room and board; and books and supplies. The plan can also be used for K-12 education, but, in this case, only $10,000 can be taken from it per year.
There are no income restrictions for contributing to a 529 plan. As long as the money from the plan is used for educational purposes, there are no federal taxes taken out.
“We tell our clients to structure their plan for college depending on their child’s needs. If you have a child who might have a special gift that’s going to get them scholarship money, you may want to look at something different than a 529 plan,” said Abrams. “But, for most people, 529 plans are one of the easiest ways to save for college.”
Preparing for homeownership
According to Abrams, two of the best savings options for buying a home are high-yield savings accounts, certificates of deposit (CDs) and money market accounts. These accounts are good for medium-term goals of one to five years.
When evaluating these accounts, it’s essential to compare interest rates to maximize earnings.
“We find that online banks offer a higher rate because they don’t have a brick-and-mortar building to pay for,” said Abrams. “But some people are not comfortable with online banks. That choice can sometimes come down to comfort level.”
He noted that credit unions also tend to offer higher interest rates. Nevertheless, exploring different rates and terms before selecting a money market account, high-yield savings account or CD is key.
“When you look at those bank products, it’s really about looking at the bank, your timeframe and the rates the banks are paying at the time,” said Abrams. “Sometimes banks have special offers or incentives for putting your money with them. It just takes a little bit of shopping to find the best rate for your needs.”
Megan Sayles is a business writer for AFRO.